Treasury silent on Tarp as banks submit $75bn SCAP capital plans

The 10 financial institutions identified as requiring additional capital under the US Treasury's Supervisory Capital Assessment Program (SCAP) economic stress tests have submitted plans describing how they intend to raise almost $75 billion in funds to bolster capital buffers against a deepening of the recession, the department announced yesterday.

The SCAP evaluated 19 US banks and other financial institutions in the second quarter and concluded that 10 of the surveyed firms required a combined $74.6 billion in additional funds to swell capital reserves and protect against a combination of macroeconomic factors prolonging the economic downturn in the US.

Under the more adverse economic scenario envisaged by regulators, GDP would drop 3.3%, average civilian unemployment would hit 8.9% and house prices would fall 22% in 2009. The SCAP also proposed that in 2010, GDP would grow by only 0.5%, average civilian unemployment would swell to 10.3% and house prices tumble by another 7%.

The stress tests found that Bank of America had the largest capital shortfall, requiring a further $33.9 billion to shore up its capital buffer, while Wells Fargo required a further $13.7 billion in capital.

Regulators also concluded that the GMAC financial services arm of bankrupt automotive giant General Motors required an additional $11.5 billion in capital and Citigroup needed to raise $5.5 billion. Regions Financial needed to increase its capital base by $2.5 billion while SunTrust required $2.2 billion, Fifth Third Bancorp another $1.1 billion and KeyCorp and Morgan Stanley both required a further $1.8 billion. Lastly, PNC had to bolster its capital cushion by $600 million.

None of the other nine banks examined - American Express, BB&T, Bank of New York Mellon, Capital One, Goldman Sachs, JP Morgan Chase, MetLife, State Street and US Bancorp - required additional capital.

In its announcement yesterday, the Treasury confirmed that the 10 banking organisations had all meet the standard it set: all had "submitted capital plans that, if implemented, would provide sufficient capital to meet the required buffer under the assessment's more-adverse scenario. As supervisors, we will be working with the institutions to ensure their plans are implemented quickly and effectively," it said in a statement.

The SCAP announcement was the only major announcement from the Treasury on a day when many market participants had expected to hear news regarding a timeframe for financial institutions to start repaying government funds handed to them under the Troubled Assets Relief Programme (Tarp) in late 2008.

On June 1, the Federal Reserve outlined the criteria it will use to evaluate applications from the 19 stress-tested banks to repay money accepted under the Tarp, stipulating that any firm looking to return taxpayer funds "must demonstrate an ability to access the long-term debt markets without reliance on the Federal Deposit Insurance Corporation's Temporary Liquidity Guarantee Program, and must successfully demonstrate access to public equity markets".

The Fed confirmed at the time that it expects to announce the initial round of repayment approvals this week and a number of Tarp recipients have publicly stated they expect to repay the funds as soon as possible.

On June 2, JP Morgan successfully priced an issue of $5 billion in common shares and stated that it would fully repay $25 billion in Tarp preferred capital by the end of the month. The same day also saw Morgan Stanley raise $2.2 billion in a new share offering and American Express raise an additional $500 million in common stock, with both companies publicly stating their intention to use the funds to buy back Tarp preferred shares from the Treasury.

Banks are eager to leave the Tarp scheme to escape government restrictions on executive compensation and the hiring of non-US nationals, among other oversight concerns.

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US insurer MetLife is fighting its designation as a systemically important financial institution - a label handed out by the FSOC in December. State supervisors are also questioning the decision: www.risk.net/2391615. Should MetLife be supervised as a Sifi?